The current labour unrest isn’t as apolitical as it looks. But don’t expect an early change in China’s autocratic leadership.

By Minxin Pei

The ongoing labour unrest in China is seen by many as a labour market response to uncompetitive wages offered by foreign companies. And, to a large extent, this is true. Changing demographics are reducing the supply of ultra-cheap young labourers from the countryside to coastal export-processing zones, giving labour more bargaining power.

But explaining China’s newly assertive workers purely on economic grounds misses the larger—and more interesting—political context. For labour activism is only one of the many signs of a broader political re-awakening in Chinese civil society.

For years, Western observers have been disheartened by the lack of political change in China. Modernization theory predicts that rapid economic progress should help liberalize the political system, but this hasn’t occurred in China since 1989. Until now.

In addition to migrant workers who have risked their jobs and personal safety in joining the strikes, China has seen other forms of civic activism and political assertiveness at the grassroots level.

What’s interesting about this new political reawakening is that on the surface it doesn’t look all that political. Instead of calling for democracy and freedom, participants in these activities focus on issues directly related to their economic interests, property rights and social justice. Examples include fighting off local governments’ attempts to build polluting factories, seize farmers’ land without compensation and evict urban residents from their homes. Criticism of government policy and performance in delivering public services and protecting social justice are routine in Chinese publications and on-line venues. And, of course, the ostensibly apolitical nature of such civic activism makes it much harder for the Communist Party to suppress it with brutal force.

Several forces have contributed to the reawakening. Clearly, the information revolution—a direct result of economic modernization—has helped change values and reduced the costs of organizing collective action. It has also magnified the political impact of such moves (even inspiring copycat action), while the rapidity with which the latest labour unrest has spread would have been inconceivable without the assistance of the Internet and cell phones.

Rising physical mobility of the population is another factor—as ordinary Chinese citizens have more opportunities to compare how conditions differ among China’s diverse localities, they acquire a greater awareness of the political and social injustice of their own surroundings and become less tolerant of such injustices.

In an important sense, the Communist Party’s own populist rhetoric has fuelled the expectations of Chinese society and, ironically, de-legitimized many of Beijing’s post-1989 policies that contributed to China’s rapid economic growth, such as courting foreign businesses, reducing social spending to boost investment and forcing tens of millions of ordinary Chinese to make enormous personal sacrifices (accepting low wages and losing their land and apartments for the sake of rapid economic growth). Now the Chinese government faces a dilemma: it has raised the people’s expectations, but meeting those expectations would be economically costly (more redistribution and social welfare) and politically risky (greater popular political participation).

The delayed political awakening of China’s civil society will have profound consequences. Economically, it will make it much harder for the government to continue to pursue its post-Tiananmen strategy of promoting economic growth at all cost. Politically, it may lead to greater disunity within the elites since some of them may be tempted to exploit rising populism for personal political advantage.

For a one-party regime for which elite unity is critical, any deep schisms within its top leadership could trigger a chain of de-stabilizing events. In addition, if the Chinese authorities fail to end the current labour unrest in foreign-invested firms, disgruntlement will likely spread to workers in other sectors (most likely in construction and mining, where working conditions are dangerous and pay extremely low).

Still, while the political awakening comes as a pleasant confirmation of the theory that economic progress will bring about political change, it can’t be assumed this emerging phenomenon will fundamentally change China’s autocratic political order. As a result of the post-Tiananmen repression, China’s civil society lacks independent centres of public morality, organizational networks and effective leadership. Most activities that challenge government authority are uncoordinated, disorganized and short-lived.

But if the Party thinks that it can continue to rule China in the same old way, it would be mistaken. If anything, the on-going labour unrest and the seismic shift in values in Chinese society show that the Party is governing a different country, where the old rules no longer apply.

Minxin Pei is an Adjunct Senior Associate at the Carnegie Endowment for International Peace and a Professor of Government at Claremont McKenna College

Woof, Now why in the world should we have all those bad old nuclear weapons on hand? Obama is putting us at risk everytime he gives one of his "We are so sorry for being more powerful than everybody else.", speeches.

During the cold war, a term used to describe the tension between communist and capitalist countries that lasted from 1947 to 1991, one of the fears was a military conflict between Russia or China and the U.S.

It didn't happen. The potential of a military war instead morphed into an economic war.

The U.S. was winning hands down for a long time, but not so much anymore. It used to be that the U.S. was number one in pretty much everything; education, technology, standard of living, economic and military strength, admired world leadership. It was leading the rest of the world into the future with the demonstrative power of democracy and free markets, new technological breakthroughs in automation, computers, communications, energy, medicine, space travel, to name a few.

In recent years, a number of countries have surpassed the U.S. in specific areas, including consumer incomes, standard of living, and health care. The true economic powerhouse, however, has been China. Some statistics, and the speed with which they have changed, have been startling.

Over the last ten years China's economy has surged past those of Canada, Spain, Brazil, Italy, France, and Germany, and is expected to pass Japan this year, to become the second largest economy in the world, behind the U.S.

Whether it's manufacturing efficiency, high-speed rail-line technology, nuclear power plant construction, clean air energy technology, education, China is making impressive global inroads, even in areas where the U.S. has significant dominance. Much of it has to do with China's massive population, about which the U.S. can do nothing about.

For instance, while U.S. Internet companies dominate global headlines, China now has the world's largest internet market as measured by the number of users. Yet internet use has only penetrated 22 percent of the population versus 75% in the U.S. Meanwhile, U.S. Internet giants like Google, Yahoo, eBay, Amazon, Facebook and Expedia are experiencing problems trying to transport their dominance into the Chinese market. Part of it is obstacles placed in their way by China's government, in support of China's state-controlled corporations. The result is Chinese internet companies like Tencent, and Baidu, cannot help but become world leaders.

Here's a statistic of more importance. U.S. universities will graduate 150,000 engineering students this year, while Chinese universities will graduate more than 500,000. I've had people tell me that's an unfair comparison since China's population is larger by approximately the same ratio. But that's not the issue. The issue is the degree to which China has moved higher education to the top of its priorities, and the fact that 500,000 new engineers a year will probably come up with more high-tech innovations than 150,000 can.

China's great leap forward has been going through the same phases the early U.S. experienced as it worked toward becoming the world's dominant economy.

When we criticize China for the treatment of its underpaid and overworked labor force we sometimes forget that in the early years the U.S. also exploited its workers, even utilizing child labor in 14 hour days in garment, textile, and shoe factories, coal mines and crop fields, which gave the country its initial low-cost jump start economically.

It appears China is beginning to exit that phase and enter the next, of treating its workers better. In the past year Chinese workers have been allowed to form unions and strike for higher wages and shorter hours at various auto and electronics plants.

The west would probably like to think that is due to the pressure put on China to improve human rights. However, China has never shown any inclination to bow to pressure in any area. The fact is that the next phase of China's economic development must be, as it was in the U.S., to develop a strong domestic economy. To do so it needs to have a more prosperous population of consumers, rather than depending on low cost exports to other countries.

Meanwhile, it can be said that China is eating America's lunch, never taking its eyes off the goal, while we squabble among ourselves, paying no attention.

That's unfortunate. As Sam Houston said in the U.S. Senate in 1850, "A nation divided against itself cannot stand."

Yet, for the last 15 years the U.S. has divided itself in increasingly bitter time and energy-consuming political arguments: the morals of Clinton, whether or not war should be waged to remove Saddam Hussein from power in Iraq, whether the country's current problems are due to the depth of the economic hole dug during the last administration, or ineptness of the current administration in pulling the economy out of the hole.

Meanwhile, China has kept its eye on the goal. It not only is making economic strides, but on the financial side has become the world's largest creditor nation, even as the U.S. has become the world's largest debtor nation, with China holding much of its debt.

The U.S. needs to interrupt its angry divisiveness and name-calling long enough to recognize the portent of what is going on. Unfortunately, in this particularly acrimonious mid-term election year, that is not going to happen.

"a strong case can be made that China is a huge bubble. Furthermore its unique demographic profile presents deep questions."

During the last expansion here, we had more GDP growth in part of a decade than they have in total GDP. China cut a corporate tax rate (Jan.2008) that was already below ours, right as our taxes were promised to get worse and right as our economy was starting to tank and needing the same type of real production stimulus. Their economy is more dependent on ours than ours is on theirs, IMO. If they outperform us going forward, the fault is all our own. They have had phenomenal growth but as Crafty hints, there is plenty wrong in China.

A healthy Chinese economy and a growing world middle class is a healthy thing for the U.S. economy, assuming we also choose to engage and compete, except for the aspect and the extent to which they are military enemies of us.

A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China.

HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency.EDITOR’S CHOICEEditorial Comment: Renminbi goes global - Aug-26David Pilling: Long march to convertibility - Aug-25Opinion: Great dangers of great powers - Aug-20Lex: McDonald’s renminbi bonds - Aug-20Beijing looks to broaden renminbi use - Aug-17Opinion: Watch China’s coasts, not its currency - Aug-10

“We’re now capable of doing renminbi settlement in many parts of the world,” said Chris Lewis, HSBC’s head of trade for greater China. “All the other major international banks are frantically trying to do the same thing.”

HSBC and StanChart are among a slew of global banks – including Citigroup and JPMorgan – holding roadshows across Asia, Europe and the US to promote the renminbi to companies.

The move aligns the banks favourably with Beijing’s policy priorities and positions them to profit from what is expected to be a rapidly growing line of business in the future.

The phenomenon will accelerate Beijing’s drive to transform the renminbi from a domestic currency into a global medium of exchange like the dollar and euro.

Chinese central bank officials accompanied StanChart bankers on a roadshow to Korea and Japan in June. The bank held similar events in London, Frankfurt and Paris.

Lisa Robins, JPMorgan’s head of treasury and securities services for China, said there had been a “spike in interest” from international clients.

An increasing number of Chinese companies have been asking foreign trading partners to accept renminbi as payment, said Carmen Ling, Hong Kong head of global transaction services at Citi.

BBVA, Spain’s second-biggest bank, is also drawing up plans for a global marketing campaign that will focus on Latin American companies that export to China.

Banks started establishing renminbi trade settlement operations in mid-2009, when Beijing introduced a pilot scheme allowing companies to use the renminbi for trade outside China.

The scramble has intensified in recent months as Beijing has substantially expanded the scheme – from a handful of Asian countries to the whole world – and introduced other liberalisations to its currency regime.

Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year – about 20 times the Rmb3.6bn recorded in the second half of 2009.

But those figures remain tiny compared to the $2,800bn worth of goods and services that were traded across China’s borders last year, most of which was settled in dollars or euros.

With renminbi trade settlement volumes expected to increase rapidly, banks are under pressure to establish a foothold in the nascent market and demonstrate to Chinese officials that they are committed to the scheme.

China has taken several steps in recent months to boost the international use of its currency and to establish Hong Kong, the special administrative region, as the global centre for offshore renminbi business.

McDonald’s, the US burger chain and icon of globalisation, took advantage of the new rules this month when it became the first foreign multinational to issue renminbi-denominated bonds in Hong Kong.

I have read that this is a good development and long overdue. For one thing the Americans have been complaining for quite some time that the fixed exchange rate was artificially low. If there is a market for their currency and a floating exchange rate, perhaps it will be right-sized.

"China is moving forward as we decline."

At this moment, yes/maybe. Given that famous traffic jam, I would say not very fast and not without bumps in the road. They are doing a couple of things right. Underlying that you will also find crony capitalism, mis-allocated resources, bad loans, overvalued assets, an unprecedented demographic scheme, inability to take on immigrants and a structural inability to make political change.

If they are moving past us they will need their own currency. But why did they not do it sooner? Certainly they were not trading in dollars as a favor to us. The dollar gave them something third world countries don't have - a stable currency. If the pendulum of forward progress swings backward a couple of times, the currency could get pounded. A floating and marketable currency will expose weakness. I hope they don't have any.

"“We’re now capable of doing renminbi settlement in many parts of the world,”"

Maybe they can and maybe you can't. But we don't have any yuan and we will be buying products from China in large quantities overnight, tomorrow morning and the next day. Those transactions will happen in dollars. If we must buy Yuan / Renminbi first, who do we buy them from? The Chinese who print it. What do we buy them with? Dollars. It's what we have. Then they have dollars to spend elsewhere in the world, like on oil/energy. Or they can invest it back in our economy, our T-bills or dollar based investments - same as they do now. They don't buy products from us for the most part so the trade / investment equation has to balance out somewhere. Looks to me like change won't be easy for them.

We have had some heated exchanges here over monetary policy. Second guessing the Fed from the armchair is easy and costs nothing. Managing your own real currency in a major lopsided economy is not. If I were the Fed advising the new currency board of the PRC my advice would be - don't try this at home.

We currently are running about the same size deficit as a % of GDP as Greece. The only difference is that we get to pay it with dollars we print. When folks stop taking our dollars we will be in the same shape as Greece. Folks have been taking our dollars for lack of alternative. Now they begin to have one. Should the trend continue, and we can no longer finance our deficits with the printing press, interest rates will shoot up-- quite possibly quite quickly as everyone heads for the exits at the same time.

Working from memory IIRC at present interest payments currently run about $250B a year- a rather hefty sum considering how low interest rates are at present. Even a moderate rise in interest rates could easily take this to over one Trillion dollars.

"United States is in danger of being in the same dire situation as Greece – national bankruptcy -- in seven to 10 years unless the federal government radically curtails spending."

I understand, however "projecting" if no changes are make that in "seven to 10 years" from now we will be in the dame dire situation as Greece is a lot different than Crafty saying "we are "currently" are running about the same size deficit as a % of GDP as Greece"

But for Reidl, who recently issued his own report on federal spending, seven to 10 years may be too optimistic.

“It’s very tough to predict when a financial crisis will hit, because much of it depends on bond market psychology,” Reidl said. “As soon as the bond market decides the U.S. may not be able to fully service its debts, they will respond with a flight from our currency. When the bond market makes that decision is really anybody’s guess. It could be two to three years from now, it could be 10 years from now.”

"When Greece started to admit its debt problems last November, the government estimated its deficit last year was 12.7 percent of its GDP – a figure that Eurostat, the European Commission’s official statistics agency, said was too low and which it revised to upward 13.6 percent. Meanwhile, the U.S. deficit is on track to become 10.3 percent of GDP in 2010 under President Obama’s budget. , , , Greece’s debt hovered above 110 percent of the GDP in November. Meanwhile, the estimated U.S. national debt was 52.9 percent of GDP in 2009 -- a significant jump from the 39.7 percent in the previous year, according to data from the CIA World Factbook."

52.9 - 39.7 does equal 13.2%, but this is the amount, as a percentage,that our debt has increased from last year. Not good. IF this trend continues we are indeep shit, but "currently" we are much better off than Greece.

Marc: Very good and , , , irrelevant. This is not the point in question. The point in question is the current magnitude of deficit spending.

52.9 - 39.7 does equal 13.2%, but this is the amount, as a percentage,that our debt has increased from last year. Not good. IF this trend continues we are indeep shit, but "currently" we are much better off than Greece.

" I couldn't find any source that verified that our current deficit was "the same size deficit as a % of GDP as Greece."

GM posted an article which contained information that included data which precisely answered your question. You responded to other data in the article as if it were the data being offered in response to your question. I then broke down the relevant data for you. Apparently I have not yet succeeded in explaining it in terms you understand.

Allow me to try again.

The point of the 13.2% number is precisely that it IS 2009's deficit and that this is greater than Greece's 2009 deficit and that my original assertion, for which you sought data, is thus supported. Yes? Anyway, is all of this really the point? The larger point is that we are running in the same neighborhood as Greece. As GM points out in his post, Greenspan is catching up with our analysis

True, they are based on some rosy scenario numbers such as that health care is net-free and that the economy will grow robustly while we continue to raise taxes during recession or stagnation. Without policy corrections, these forecasts will be WAY off the mark and reality will be far worse IMHO.

When Greece imploded, some thought it would bring down the Euro, the EU, the world financial system etc. It did not all come true but when the U.S. fails, only that one guy in the Amazon will be unaffected.

JDN, the original point was that we are loaded in debt and loading up more with no end in sight. Current (deemed but not passed) budget is roughly $4T revenues, $2.5T revenues resulting in $1.5T in new debt or monetized deficit. Totally irresponsible and was enabled but not caused by China. Crafty is right that whatever that true debt burden is now we have not felt the main impact yet with interest rates artificially held close to zero. When interest rates skyrocket beyond our control, we are screwed and so are our creditors.

Crafty's wrote: "...we get to pay it (international debt) with dollars we print."

- What that means to me is that unlike third world countries, we (unfortunately) can inflate our way part way out of that burden, creating other/worse burdens.

"When folks stop taking our dollars we will be in the same shape as Greece. Folks have been taking our dollars for lack of alternative. Now they begin to have one. Should the trend continue, and we can no longer finance our deficits with the printing press, interest rates will shoot up-- quite possibly quite quickly as everyone heads for the exits at the same time."

- China's economy is built largely on export sales and its trade imbalance with the US (and elsewhere). If they sell to Americans who have only dollars while not buying our products they will have excess dollars. World trade if you include the investment and financial side offsetting the imbalanced flow of goods and services is a closed system. I don't see how they quit buying dollar based investments without first correcting the trade imbalance. If they sell off their dollars or dollar based investments, then someone else is holding them.

If the currency change is successful from the Chinese point of view, I think it would force both countries to behave more responsibly. (ex: Greek lawmakers approved sweeping pension reforms July 10 2010 http://www.reuters.com/article/idUSTRE6674K320100708) China needs to allow domestic consumption and personal wealth to start catching up with its production side and America needs to stop punishing our own manufacturers with the myriad of increasing rules, mandates, prohibitions, taxes, and start moving our federal budget back toward balance.

More likely this currency experiment will fail IMO for the same reasons that they were unable to do it previously.

The good news is that deficits and GDP are inversely related, not proportional. Most of current spending is not going to go away. The boldest proposal out there only rolls it back to 2008 levels. We can only grow revenues and thus shrink deficits by growing GDP so pro-growth policies if we could find some would improve both measures simultaneously. If we grow the private economy, deficits will shrink IF we find sane people to watch over public spending while we do this. And if we continue to steal the resources of our economy for the public sector, the GDP will not grow. The burden of the accumulated debt shrinks during times of high growth as a percentage of the total economy, but again only if public spending is controlled and contained.

I remember one of the pundits lamenting last year that China was the last check or balance left on our irresponsibility once Peloi-Reid-Obama gained their 60th vote in the senate. This news seems to illustrate that.

The National Iranian Petrochemical Company and a Chinese consortium are completing talks on an agreement under which China would funnel some $1 billion into petrochemical projects in Iran, Mehr News Agency reported Aug. 28. The construction of the petrochemical facilities requires a total of $43 billion in investment funds; contracts have already been signed to implement 28 of those projects.

"an important strand of China's strategy is to use those dollars to buy assets, raw materials, etc world-wide."

Yes. So the 2 largest energy importers buy oil in dollars hence oil is sold in dollars, oil suppliers take in dollars, buy or invest back into what they need, all over the world - in dollars. I'm not able to see how that cycle breaks in favor of the Chinese currency without a change in underlying fundamentals.

We also have a trade deficit with Europe, peaked at about $140-150 billion/yr. which floods dollars, not Euros into the global market.

The total US trade deficit peaked at about $700-750 in the healthy economy of 2005-2008. (That number is down in this recession) We are running a trade deficit with the rest of the world outside of China and Europe of roughly $250 billion/yr. That is net of what they spend with us so they must buy elsewhere using dollars or invest/lend back to the US in dollars.

The US imports 66% of its oil, buys primarily in US$, $400 billion/yr,

The US restricts domestic oil production. Those restrictions cause much of the import requirement which causes dollars to leave the US.

China for the most part does not need US manufactured goods (and steals our technology anyway).

China consumers use perhaps a few hundred billion dollars/yr worth of US software, music, movies, patent infringements, etc. that they don't pay for (which would otherwise create some balance in trade).

The US zones, restricts, regulates, taxes, creates work rules, has pending energy use legislation, health care mandates, etc. that make US goods largely non-competitive in an economically freer country like China (it hurts to say that). US auto manufacturing pays more for healthcare than steel.

China imports oil at $150-200 billion /yr.

US budget deficit is currently at 1500-1600 billion.

Of our public debt, 25% is owned by foreign governments, 22% of that is owned by China. Those percentages will need to be updated after we see who is buying all our new debt. At those percentages that would be $88 Billion per year bought by the China. In other words, a part of their trade surplus comes back in there and a part of those dollars go into the global economy via their oil suppliers.-------------------

These imbalances combine to make bidirectional and circular flows of funds that find a balance. Each piece of the imbalance above either enables or causes something else to occur or exist, depending on how you look at it. Floating or changing exchange rates also play a role in finding balance, as we see between the dollar and the Euro, but did not have with China.----------------------------Changing fundamentals:

If China had a middle class demanding and purchasing goods from around the world up to near the amount of Chinese exports - it would not find itself holding dollars and using them for other purchases like oil and buying T-bills.

If the US produced all of its own oil that it could - fewer dollars would flood the world markets.

If the US moved toward rough balance in its federal budget - we would need fewer dollars to come back in to lend us our public debts.

If China enforced US/World copyright/patent/trademark laws - we would have some chance at approaching trade parity.

If the US committed itself to being a competitive place to locate, manufacture, produce and export from instead of a place actively looking for ways to hinder production and punish profits - US goods would be more competitive, we would export more, employ more people in manufacturing and send fewer net dollars out.

As economies elsewhere develop, prosper, grow a middle class and their own industries, and develop legal systems to enforce global patents copyrights etc., they become viable markets for US export sales for technologies, intellectual property products, services, etc. China has economic growth but does not seem to grow its middle class or bring its legal/political system up intot he 19th century or beyond.-----

Very true that we certainly don't want to be borrowing our excesses in foreign currency but also true that we shouldn't want to be borrowing our excesses from anyone.

If you leave these fundamentals in place, the current cycle is hard to break. China needs to sell to America to get a significant part of its money and growth and that money is in dollars. Then China needs to spend or invest those dollars somewhere. They can require foreign sales in Yuan (Renminbi) but the customer cannot pay with them if they don't have them and unless they are an oil exporter, China is not buying their products with any proportionality.

LIU JIN/AFP/Getty ImagesPeople’s Bank of China Gov. Zhou XiaochuanRumors have circulated in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country. The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou. Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China.

STRATFOR has received no confirmation of the rumor, and reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment. However, the release of this rumor and its dispersion throughout the public is significant, particularly as the Communist Party of China (CPC) is preparing for a leadership transition in 2012.

Chinese state-run media and official government websites have run several high-profile reports about Zhou, which should be seen as a move to refute the rumors. The PBC website published two articles on its homepage reporting on Zhou’s meeting with visiting Japanese Financial Services Minister Shozaburo Jimi during the third China-Japan high-level economic dialogue as well as a meeting with an Italian delegation. Xinhua news agency reported that Zhou told the PBC Party Committee Enlargement Meeting on Aug. 30 it should “continue to implement justice, and strengthen legislative work in the financial system.” Prior to this news, Zhou appeared at the 2nd annual conference of the heads of the Chinese, Japanese and Korean central banks held on Aug. 3, and his most recent public appearance was Aug. 10 for China’s Financial System Anti-corruption Construction Exhibition.

Zhou is known to have lofty political ambitions and is believed to be a close ally to former Chinese President Jiang Zemin, as well as a core figure for Jiang’s “Shanghai Gang.” There has been no shortage of rumors about Zhou’s possible dismissal in the past five years, as he is believed to be associated with several high-level financial scandals. For example, Zhou was rumored to be under “shuanggui,” a form of house arrest administered by the CPC, during the massive crackdown of Shanghai Party Secretary Chen Liangyu in 2006, which was perceived in the country as a crackdown of the Shanghai Gang and part of Hu’s effort to consolidate power ahead of the 2007 power transition. There was also a rumor that he might have been detained following the investigation and arrest of Wang Yi, the vice governor of the China Development Bank, along with several other officials in the financial circle. Currently, several financial scandals are still under investigation, and it is likely that Zhou, as PBC governor and one of the most powerful economic players in the country, could be associated with some cases. Therefore, whether or not the rumor is true at this time, the leaking of this news is very likely to be associated with a power struggle within the Communist Party’s economic hierarchy.

In 2012, the Communist Party of China’s (CPC) leaders will retire and a new generation — the so-called fifth generation — will take the helm. The transition will affect the CPC’s most powerful decision-making organs, determining the makeup of the 18th CPC Central Committee, the Political Bureau (Politburo) of the Central Committee, and most important, the nine-member Politburo Standing Committee that is the core of political power in China.

While there is considerable uncertainty over the handoff, given China’s lack of clear, institutionalized procedures for succession and the immense challenges facing the regime, there is little reason to anticipate a succession crisis. But the sweeping personnel change comes at a critical juncture in China’s modern history, with the economic model that has enabled decades of rapid growth having become unsustainable, social unrest rising, and international resistance to China’s policies increasing. At the same time, the characteristics of the fifth generation leaders suggest a cautious and balanced civilian leadership paired with an increasingly influential and nationalist military. This will lead to frictions over policy even as both groups remain firmly committed to perpetuating the regime.

The Chinese leadership that emerges from 2012 will likely be unwilling or unable to decisively carry out deep structural reforms, obsessively focused on maintaining internal stability, and more aggressive in pursuing the core strategic interests it sees as essential to this stability.

Just as China’s civilian leadership will change, China’s military will see a sweeping change in leadership in 2012. The military’s influence over China’s politics and policies has grown over the past decade, as the country has striven to professionalize and modernize its forces and expand its capabilities in response to deepening international involvement and challenges to its internal stability. The fifth generation military leaders are the first to have come out of the military modernization process, and to have had their careers shaped by the priorities of a China that has become a global economic power. They will take office at a time when the military’s budget, stature and influence over politics is growing, and when it has come to see its role as extending beyond that of a guarantor of national security to becoming a guide for the country as it moves forward and up the ranks of international power.

Civilian Leadership

Power transitions in the People’s Republic of China have always been fraught with uncertainty because the state does not have clear and fixed institutional procedures for the transfer of power between leaders and generations. The state’s founding leader, Mao Zedong, did not establish a formal process before he died, giving rise to a power struggle. Mao’s eventual successor, Deng Xiaoping, was also a strong leader whose personal power could override rules and institutions. But Deng’s retirement also failed to set a firm succession precedent. He saw two of his chosen successors lose out amid factional struggles, and Deng maintained extensive influence well after formally retiring and passing power to Jiang Zemin and naming Jiang’s successor, current President Hu Jintao.

Even though China does not have any fixed rules on power transfers, a series of precedents and informal rules have been observed. Recent years have seen a move toward the solidification of these rules. Deng set a pattern in motion that smoothed the 2002 presidential transition from Jiang to Hu despite behind-the-scenes factional tensions. As mentioned, Deng had also appointed Hu to be Jiang’s successor. This lent Hu some of Deng’s great authority, thus establishing an air of inevitability and deterring potential power grabs. This leap-frog pattern was reinforced when Jiang put Vice President Xi Jinping in line to succeed Hu in 2012. The coming transfer will test whether the trend toward stable power transitions can hold.

Characteristics of the Fifth Generation

While all countries experience leadership changes that can be described as generational in one sense or another, modern Chinese history has been so eventful as to have created generations that, as a group, share distinct characteristics and are markedly different from their forebearers in their historical, educational and career experiences. Deng created the concept of the “generational” framework by dubbing himself the core second-generation leader after Mao, and events and patterns in leadership promotion and retirement reinforced the framework. The most defining factor of a Chinese leadership generation is its historical background. The first generation defined itself by the formation of the Communist Party and the Long March of exile in the 1930s, the second generation in the war against the Japanese (World War II), and the third during civil war and the founding of the state in 1949. The fourth generation came of age during the Great Leap Forward in the late 1950s, Mao’s first attempt to transform the entire Chinese economy.

The fifth generation is the first group of leaders that cannot — or can only barely — remember a time before the foundation of the People’s Republic. These leaders’ formative experiences were shaped during the Cultural Revolution (1967-77), a period of deep social and political upheaval in which the Mao government empowered hard-liners to purge their political opponents in the bureaucracy and Communist Party. Schools and universities were closed in 1966 and youths were sent down to rural areas to do manual labor, including many fifth-generation leaders such as likely future President Xi Jinping. Some young people were able to return to college after 1970, where they could only study Marxism-Leninism and CPC ideology, while others sought formal education when schools were reopened after the Cultural Revolution. Very few trained abroad, so they did not become attuned to foreign attitudes and perceptions in their formative days (whereas the previous generation had sent some young leaders to study in the Soviet Union). Characteristically, given the fuller educational opportunities that arose in the late 1970s, the upcoming leaders have backgrounds in a wide range of studies. Many were trained as lawyers, economists and social scientists, as opposed to the engineers and natural scientists who have dominated the previous generations of leadership.

TEH ENG KOON/AFP/Getty ImagesPolitburo Standing Committee member Xi Jinping at the National People’s Congress meeting in MarchIn 2012, only Vice President Xi Jinping and Vice Premier Li Keqiang will remain on the Politburo Standing Committee, the core decision-making body in China. Seven new members will join, assuming the number of total members remains at nine, which has been the case since 2002. All seven will hail from the broader Politburo and were born after October 1944, in accordance with an unwritten rule established under Deng requiring Chinese leaders to retire at age 70 (it was lowered to 68 in 1997). The retiring leaders will make every effort to strike a deal preventing the balance of power within the Politburo and the Politburo Standing Committee from tipping against them and their faction.

At present, China’s leaders divide roughly into two factions broadly defined as the populists and the elitists.

The populists are associated with Hu Jintao and the China Communist Youth League (CCYL) and are more accurately referred to as the “league faction” (in Chinese, the “tuanpai”). In the 1980s Hu led the league, which comprises his political base. The CCYL is a massive organization that prepares future members of the CPC. It is structured with a central leadership and provincial and local branches based in the country’s schools, workplaces, and social organizations. In keeping with the CCYL’s rigid hierarchy and doctrinal training, the policies of Hu’s “CCYL clique” focus on centralizing and consolidating power, maintaining social stability, and seeking to redistribute wealth to alleviate income disparities, regional differences, and social ills. The clique has grown increasingly powerful under Hu’s patronage. He has promoted people from CCYL backgrounds, some of whom he worked with during his term as a high-level leader in the group in the early 1980s, and has increased the number of CCYL-affiliated leaders in China’s provincial governments. Several top candidates for the Politburo Standing Committee in 2012 are part of this group, including Li Keqiang and Li Yuanchao, followed by Liu Yandong, Zhang Baoshun, Yuan Chunqing, Liu Qibao and Wang Yang.

The elitists are leaders associated with former President Jiang Zemin and his Shanghai clique. Their policies aim to maintain China’s rapid economic growth, with the coastal provinces unabashedly leading the way. They also promote economic restructuring to improve China’s international competitiveness and reduce inefficiencies, even at the risk of painful changes for some regions or sectors of society. The infamous “princelings” — or the sons, grandsons and relatives of the CPC’s founding fathers and previous leaders who have risen up the ranks of China’s system through these familial connections — are often associated with the elitists. The princelings are criticized for benefiting from nepotism, and some have suffered from low support in internal party elections. Still, they have name recognition from their proud Communist family histories, the finest educations and career experiences and access to personal networks set up by their fathers. The Shanghai clique and princelings are joined by economic reformists of various stripes who come from different backgrounds, mostly in the state apparatus such as the central or provincial bureaucracy and ministries, who often are technocrats and specialists. Prominent members of this faction eligible for the 2012 Politburo Standing Committee include Wang Qishan, Zhang Dejiang, Bo Xilai, Yu Zhengsheng and Zhang Gaoli.

The struggle between the populist and elitist factions is a subset of the deeper struggle in Chinese history between centralist and regionalist impulses. Because of China’s vast and diverse geography, China historically has required a strong central government, usually located on the North China Plain, to maintain political unity. But this cyclical unity tends to break down over time as different regions pursue their own interests and form relationships with the outside world that become more vital to them than unity with the rest of China. The tension between centralist and regionalist tendencies has given rise to the ancient struggle between the north (Beijing) and the south (Shanghai), the difficulties that successive Chinese regimes have had in subordinating the far south (i.e. Guangdong and the Pearl River Delta), and modern Beijing’s anxiety over the perceived threat of separatism from Taiwan, Xinjiang and Tibet. In this context, the struggle between the two dominant political factions appears as the 21st century political manifestation of the irresolvable struggle between the political center in Beijing and the other regions, whose economic vibrancy leads them to pursue their own ends. While Hu Jintao and his allies emphasize central control and redistributing regional wealth to create a more unified China, the followers of Jiang tend to emphasize the need to let China’s most competitive regions grow and prosper, often in cooperation with international partners, without being restrained by the center or weighed down by the less dynamic regions.

Factional Balance

The politicians almost certain to join the Politburo Standing Committee in 2012 appear to represent a balance between factional tendencies. The top two, Xi Jinping and Li Keqiang, are the youngest members of the current Politburo Standing Committee and are all but certain to become president and premier, respectively. Xi is a princeling — son of Xi Zhongxun, an early Communist revolutionary and deputy prime minister — and his leadership in Fujian, Zhejiang and Shanghai exemplifies the ability of coastal manufacturing provinces to enhance an official’s career. But Xi is also popular with the public, widely admired for his hardships as a rural worker during the Cultural Revolution. He is the best example of bridging both major factions — promoting economic reforms but seen as having the people’s best interests at heart. Li was trained as an economist under a prestigious teacher at Beijing University, received a law degree, and is a former top secretary of the CCYL and stalwart of Hu’s faction. Economics is his specialty, not in itself but as a means to social harmony. For example, he is famous for promoting further revitalization of northeastern China’s industrial rust belt of factories that have fallen into disrepair. Li also has held leadership positions in provinces like Henan, an agricultural province, and Liaoning, a heavy-industrial province, affording him a view of starkly different aspects of the national economy.

After Xi and Li, the most likely contenders for seats on the Politburo Standing Committee are Li Yuanchao, director of the CPC’s powerful organization department (CCYL clique), Wang Yang (CCYL), member of the CPC’s Politburo, Liu Yunshan (CCYL), director of the CPC’s propaganda department, and Vice Premier Wang Qishan (princeling/Jiang’s Shanghai clique). The next most likely candidates include Vice Premier Zhang Dejiang (Jiang’s Shanghai clique), Chongqing Party Secretary Bo Xilai (princeling), Tianjin Party Secretary Zhang Gaoli (Jiang’s Shanghai clique) and CPC General Office Director Ling Jihua (secretary to Hu Jintao, CCYL clique). It is impossible to predict exactly who will be appointed to the Politburo Standing Committee. The lineup is the result of intense negotiation between the current committee members, with the retiring members (everyone except Xi Jinping and Li Keqiang) wielding the most influence. Currently, of the nine Politburo Standing Committee members, as many as six are Jiang Zemin proteges, and they will push for their followers to prevent Hu from taking control of the committee.

(click here to enlarge image)It accordingly seems possible that the 2012 Politburo Standing Committee balance will lean slightly in favor of Jiang’s Shanghai clique and the princelings, given that Xi Jinping will hold the top seat, but that by numbers the factions will be evenly balanced. Like his predecessors, Xi will have to spend his early years as president attempting to consolidate power so he can put his followers in positions of influence and begin to shape the succeeding generation of leaders for the benefit of himself and his circle. An even balance, if it is reached, may not persist through the entire 10 years of the Xi and Li administration: the CCYL clique looks extremely well-situated for the 2017 reshuffle, at which point many of Jiang’s proteges will be too old to sit on the Politburo Standing Committee while a number of rising stars in the CCYL currently serving as provincial chiefs will be well-placed for promotion.

There is a remote possibility that the number of seats on the Politburo Standing Committee could be cut from nine to seven, the number of posts before 2002. This would likely result in a stricter enforcement of age limits in determining which leaders to promote, perhaps setting the cutoff age at 66 or 67 (instead of 68). Stricter age criteria could eliminate three contenders from Jiang’s Shanghai clique (Zhang Gaoli, Zhang Dejiang, and Shanghai Party Secretary Yu Zhengsheng) and one from Hu’s clique (Politburo member Liu Yandong). This would leave Bo Xilai (a highly popular princeling with unorthodox policies, but like Xi Jinping known to straddle the factional divide) and CPC General Office Director Ling Jihua (secretary to Hu Jintao, CCYL clique) as the most likely final additions to the Politburo Standing Committee. The overall balance in this scenario of slightly younger age requirements would then lean in favor of Hu’s clique.

The factions are not so antagonistic that an intense power struggle is likely to rip them apart. Instead, they can be expected to exercise power by forging compromises. Leaders are chosen by their superiors through a process of careful negotiation to prevent an imbalance of one faction over another that could lead to purges or counterpurges. That balance looks as if it will roughly be maintained in the configuration of leaders in 2012. In terms of policymaking, powerful leaders will continue to debate deep policy disagreements behind closed doors. Through a process of intense negotiation, they will try to arrive at a party line and maintain it uniformly in public. Stark disagreements and fierce debates will echo through the statements of minor officials and academics, and in public discussions, newspaper editorials, and other venues, however. In extreme situations, these policy battles could lead to the ousting of officials who end up on the wrong side. But the highest party leaders will not contradict each other openly on matters of great significance unless a dire breakdown has occurred, as happened with fallen Shanghai Party Secretary Chen Liangyu.

That the fifth generation leadership appears in agreement on the state’s broadest economic and political goals, even if they differ on the means of achieving those goals, will be conducive to maintaining the factional balance. First, there is general agreement on the need to continue with China’s internationally oriented economic and structural reforms. These leaders spent the prime of their lives in the midst of China’s rapid economic transformation from a poor and isolated pariah state into an international industrial and commercial giant, and were the first to experience the benefits of this transformation. They also know that the CPC’s legitimacy has come to rest, in great part, on its ability to deliver greater economic opportunity and prosperity to the country — and that the greatest risk to the regime would likely come in the form of a shrinking or dislocated economy that causes massive unemployment. Therefore, for the most part they remain dedicated to continuing with market-oriented reform. They will do so gradually and carefully, however, and will not seek to intensify reformist efforts to the point of dramatically increasing the risk of social disruption. Needless to say, while the elitists can be energetic in their pursuit of economic liberalization, the populists tend to be more suspicious and more willing to re-centralize controls to avoid undesirable political side effects, even at the expense of long-term risks to the economy.

More fundamentally, all fifth generation leaders are committed to maintaining CPC rule. The chaos of the Cultural Revolution impressed upon the fifth generation a sense of the extreme dangers of China’s having allowed an autocratic ruler to dominate the decision-making process and intra-party struggle to run rampant. Subsequent events have reinforced the fear of internal divisions: the protest and military crackdown at Tiananmen Square in 1989, the threat of alternative movements exemplified by the Falun Gong protest in 1999, the general rise in social unrest throughout the economic boom of the 1990s and 2000s. More recent challenges have reinforced this, such as natural disasters like the Sichuan earthquake in 2008, ethnic violence and riots in Tibet in 2008 and Xinjiang in 2009, and the pressures of economic volatility since the global economic crisis of 2008. These events have underscored the need to maintain unity and stability in the Party ranks and in Chinese society, by force when necessary. So while the fifth generation is likely to agree on the need to continue with economic reform and perhaps even limited political reform, it will do so only insofar as it can without destabilizing socio-political order. It will delay, soften, undermine, or reverse reform to ensure stability. Once again, the difference between the factions lies in judging how best to preserve and bolster the regime.

Regionalism

Beyond the apparent balance of forces in the central party and government organs, there remains the tug-of-war between the central government in Beijing and the 33 provincial governments (not to mention Taiwan) — a reflection of the timeless struggle in China between center and periphery. If China is to be struck by deep destabilization under the watch of the fifth generation leaders (which is by no means impossible, especially given the economic troubles facing them), the odds are this would occur along regional lines. Stark differences have emerged, as China’s coastal manufacturing provinces have surged ahead while provinces in the interior, west and northeast have lagged. The CPC’s solution to this problem generally has been to redistribute wealth from the booming coast to the interior in hopes that subsidizing the less developed regions eventually will nurture economic development. In some instances, such as in Shaanxi or Sichuan provinces, urbanization and development have indeed accelerated in recent years. But overall, the interior remains weak and dependent on subsidies from Beijing.

The problem for China’s leadership is that the coastal provinces’ export-led model of growth that has worked well over the past three decades has begun to peak, and China’s annual double-digit growth rates are expected to slow due to weakening external demand, rising labor and material costs and other factors. The result will be louder demands from poor provinces and tighter fists in rich provinces — exposing and deepening competition, and in some cases leading to animosity between the regions.

More so than any previous generation, the fifth generation has extensive cross-regional career experience. This is because climbing to the top of Party and government has increasingly required that many of these leaders first serve in central organizations in Beijing and then do a stint (or more) as governor or Party secretary of one of the provinces (the more far-flung, the better), before returning to a higher central Party or government position in Beijing. Hu Jintao followed such a path, as have many of the aforementioned candidates for the Politburo Standing Committee. Moreover, it has become increasingly common to put officials in charge of a region other than the one from which they originally hailed to reduce regionalism and regional biases. This practice has precedent in China’s imperial history, when it was used to prevent the rise of mini-fiefdoms and the devolution of power. More of the likely members of the 2012 Politburo Standing Committee than ever before have experience as provincial chiefs. This means that when these leaders take over top national positions, they theoretically will have a better grasp of the realities facing the provinces they rule, and will be less likely to be beholden to a single regional constituency or support base. This could somewhat mitigate the central government’s difficulty in dealing with profound divergences of interest between the central and provincial governments.

But regional differences are grounded in fundamental, geographical and ethnic realities, and have become increasingly aggravated by the disproportionate benefits of China’s economic success. Temporary changes of position across the country have not prevented China’s leaders from forming lasting bonds with certain provinces to the neglect of others; and many politicians still have experience exclusively with the regional level of government, and none with the central. The patron-client system, by which Chinese officials give their loyalty to superiors in exchange for political perks or monetary rewards, remains ineradicable. Massive personal networks extend across party and government bureaus, from the center to the regions. Few central leaders remain impervious to the pull of these regional networks, and none can remain in power long if his or her regional power base or bases have been cut. The tension between the center and provinces will remain one of the greatest sources of stress on the central leadership as it negotiates national policy.

As with any novice political leadership, the fifth generation leaders will take office with little experience of what it means to be fully in charge of a nation. Provincial leadership experience has provided good preparation, but the individual members have yet to show signs of particularly strong national leadership capabilities. The public sees only a few of the upcoming members of the Politburo Standing Committee as successfully having taken charge during events of major importance (for instance, Xi Jinping’s response to Tropical Storm Bilis, Wang Qishan’s handling of the SARS epidemic and the Beijing Olympics); only one has military experience (Xi, and it is slight); and only a few of the others have shown independence or forcefulness in their leadership style (namely Wang Qishan and Bo Xilai). Because current Politburo Standing Committee members or previous leaders (like former President Jiang Zemin) will choose the future committee members after painstaking negotiations, this might preserve the balance of power between the cliques. It might also result in a “compromise” leadership — effectively one that would strive for a middle-of-the-road approach, even at the cost of achieving mediocre results. A collective leadership of these members, precariously balanced, runs the risk of falling into divisions when resolute and sustained effort is necessary, as is likely given the economic, social and foreign policy challenges that it will likely face during its tenure.

This by no means is to say the fifth generation is destined to be weak. Chinese leaders have a time-tested strategy of remaining reserved for as long as possible and not revealing their full strength until necessary. And China’s centralist political system generally entails quick implementation once the top leadership has made up its mind on a policy. Still, judging by available criteria, the fifth generation leaders are likely to be reactive, like the current administration. Where they are proactive, it will be on decisions pertaining to domestic security and social stability.

Military Leadership

The Rise of the People’s Liberation Army

PHILIPPE LOPEZ/AFP/Getty ImagesChinese soldiers at the World Expo 2010 in ShanghaiAfter Deng’s economic reforms, the Chinese military began to use its influence to get into industry and business. Over time, this evolved into a major role for the military on the local and provincial level. Military commands supplemented their government budget allocations with the proceeds from their business empires. Ultimately, the central government and Party leadership became concerned that the situation could degenerate into regional warlordism of the sort that has prevailed at various times in Chinese history — with military-political-business alliances developing more loyalty to their interests and foreign partners than to Beijing. Thus when Jiang launched full-scale reforms of the military in the 1990s, he called for restructuring and modernization (including cutting China’s bloated ground forces and boosting the other branches of service) and simultaneously ordered the military to stop dabbling in business. Though the commanders only begrudgingly complied at first, the military-controlled businesses eventually were liquidated and their assets sold (either at a bargain price to family members and cronies or at an inflated price to local governments). To replace this loss of revenue and redesign the military, the central government began increasing budgetary allocations focusing on acquiring new equipment, higher technology, and training and organization to promote professionalism. The modernization drive eventually gave the military a new sense of purpose and power and brought a greater role to the PLA Navy (PLAN), the PLA Air Force (PLAAF), and the Second Artillery Corps (the strategic missile corps).

The military’s influence appears highly likely to continue rising in the coming years for the following reasons:

Maintaining internal stability in China has resulted in several high-profile cases in which the armed forces played a critical role. Natural disasters such as massive flooding (1998, 2010) and earthquakes (especially in Sichuan in 2008) have required the military to provide relief and assistance, giving rise to more attention on military planning and thereby improving the military’s propaganda efforts and public image and prestige. Because China is prone to natural disasters and its environmental difficulties have worsened as its massive population and economy have put greater pressure on the landscape, the military is expected to continue playing a greater role in disaster relief, including by offering to help abroad. At the same time, the rising frequency of social unrest, including riots and ethnic violence in regions like Xinjiang and Tibet, has led to military involvement in such matters. As the trend of rising social unrest looks to continue in the coming years, so the military will be called upon to restore order, especially through the elite People’s Armed Police, which falls under the joint control of the Central Military Commission and State Council.As China’s economy has become the second largest in the world, its international dependencies have increased. China depends on stable and secure supply lines to maintain imports of energy, raw materials, and components and exports of components and finished goods. Most of these commodities and merchandise are traded over sea, often through choke-points such as the straits of Hormuz and Malacca, making them vulnerable to interference from piracy, terrorism, conflicts between foreign states, or interdiction by navies hostile to China (i.e., the United States, India or Japan). Therefore it needs the PLAN to expand its capabilities and reach so as to secure these vital supplies — otherwise the economy would be exposed to potential shocks that could translate into social and political disturbances. This policy has also led the PLA to take a more active role in U.N. peacekeeping efforts and other international operations, expand integrated training and ties with foreign militaries, and build a hospital ship to begin military-led diplomacy.Competition with foreign states is intensifying as China has become more powerful economically and internationally conspicuous. In addition to building capabilities to assert its sovereignty over Taiwan, China has become more aggressive in defending its sovereignty and territorial claims in its neighboring seas — especially in the South China Sea, which Beijing elevated in 2010 to a “core” national interest (along with sovereignty over Taiwan and Tibet) and also in the East China Sea. This assertiveness has led to rising tension with neighbors that have competing claims on potentially resource-rich territory in the seas, including Vietnam, the Philippines, Indonesia, Malaysia, Brunei and Japan. Moreover, Beijing’s newfound assertiveness has collided with U.S. moves to bulk up its alliances and partnerships in the region, which Beijing sees as a strategy aimed at constraining China’s rise.China’s military modernization remains a primary national policy focus. Military modernization includes acquiring and developing advanced weaponry, improving information technology and communications, heightening capabilities on sea and in the air, and developing capabilities in new theaters such as cyberwarfare and outer space. It also entails improving Chinese forces’ mobility, rapid reaction, special operations forces and ability to conduct combined operations between different military services. The PLA has become more vocal, making statements and issuing editorials in forums like the PLA Daily and, for the most part, receiving positive public responses. In many cases, military officers have voiced a nationalistic point of view shared by large portions of the public (though one prominent military officer, Liu Yazhou, a princeling and commissar at National Defense University, has used his standing to call for China to pursue Western-style democratic political reforms). Military officials can strike a more nationalist pose where politicians would have trouble due to consideration for foreign relations and the concern that nationalism is becoming an insuppressible force of its own.Of course, a more influential military does not mean one that believes it is all-powerful. China will still try to avoid direct confrontation with the United States and its allies and maintain relations internationally given its national economic strategy and the fact that its military has not yet attained the same degree of sophistication and capability as its chief competitors. But the military’s growing influence is likely to encourage a more assertive China, especially in the face of heightened internal and external threats.

The Central Military Commission (CMC) is the state’s most powerful military body, comprising the top ten military chiefs, and chaired by the country’s civilian leader. This means the CMC has unfettered access to the top Chinese leader, and can influence him through a more direct channel than through its small representation on the Politburo Standing Committee. Thus the CMC is not only the core decision-making body of the Chinese military, it is also the chief conduit through which the military can influence the civilian leadership.

(click here to enlarge image)Promotions for China’s top military leaders are based on the officer’s age, his current official position — for instance, whether he sits on the CMC or in the CPC Central Committee — and his personal connections. Officers born after 1944 will be too old for promotion since they will be 68 in 2012, past the de facto cutoff age after which an officer is no longer eligible for promotion to the CMC. Those officers meeting the age requirement and holding positions on the CMC, the CPC Central Committee, or a command position in one of China’s military services or its seven regional military commands (or the parallel posts for political commissars) may be eligible for promotion.

China’s paramount leader serves simultaneously as the president of the state, the general-secretary of the Party, and the chairman of the military commission, as Hu does. The top leader does not always hold all three positions, however: Jiang held onto his chair on the CMC for two years after his term as president ended in 2002. Since Hu did not become CMC chairman until 2004, it is not unlikely that he will maintain his chair until 2014, two years after he gives up his presidency and leadership of the party. But this is a reasonable assumption, not a settled fact, and some doubt Hu’s strength in resolving such questions in his favor.

Interestingly, Hu has not yet appointed Vice President Xi Jinping to be his successor on the CMC, sparking rumors over the past year about whether Hu is reluctant to give Xi the vice chairmanship or whether Xi’s position could be at risk. But Hu will almost certainly dub Xi his successor as chairman of the CMC soon, probably in October. Given the possibility that Hu could retain his CMC chairmanship till 2014, Xi’s influence over the military could remain subordinate to Hu’s until then, raising uncertainties about how Hu and Xi will interact with each other and with the military during this time. Otherwise, Xi will be expected to take over the top military post along with the top Party and state posts in 2012.

Old and New Trends

Of the leading military figures, there are several observable trends. Regional favoritism in recruitment and promotion remains a powerful force, and regions that have had the greatest representation on the CMC in the past will retain their prominent place: Shandong, Hebei, Henan, Shaanxi and Liaoning provinces, respectively, appear likely to remain the top regions represented by the new leadership, according to research by Cheng Li, a prominent Chinese scholar. These provinces are core to the CPC’s support base. There is considerably less representation in the upper officer corps from Shanghai, Guangdong, Sichuan, or the western regions, all of which are known for regionalism and are more likely to stand at variance with Beijing. (This is not to say that other provinces, Sichuan for instance, do not produce a large number of soldiers.)

One group of leaders, the princelings, are likely to take a much greater role in the CMC in 2012 than in the current CMC, in great part because these are the children or relatives of Communist Party revolutionary heroes and elites and were born during the 1940s-50s. Examples include the current naval commander and CMC member Wu Shengli, political commissar of the Second Artillery Corps Zhang Haiyang, and two deputy chiefs of the general staff, Ma Xiaotian and Zhang Qinsheng. In politics, the princelings are not necessarily a coherent faction with agreed-upon policy leanings. Though princeling loyalties are reinforced by familial ties and inherited from fathers, grandfathers and other relatives, they share similar elite backgrounds, their careers have benefited from these privileges, and they are viewed and treated as a single group by everyone else. In the military, the princelings are more likely to form a unified group capable of a coherent viewpoint, since the military is more rigidly hierarchical and personal ties are based on staunch loyalty. The strong princeling presence could constitute an interest group within the military leadership capable of pressing more forcefully for its interests than it would otherwise be able to do.

A marked difference in the upcoming CMC is the rising role of the PLAN, PLAAF and Second Artillery Corps, as against the traditionally dominant army. This development was made possible by the enlargement of the CMC in 2004, elevating the commanders of each of these non-army services to the CMC, and it is expected to hold in 2012. The army will remain the most influential service across the entire fifth generation military leadership, with the navy, air force, and missile corps following close behind. But crucially, in the 2012 CMC the army’s representation could decline relative to the other branches of service, since of the three members of the current CMC eligible to stay only one comes from the army (General Armaments Department Director Chang Wangquan) and many of the next-highest candidates also hail from other services. After all, missile capabilities and sea and air power are increasingly important as China focuses on the ability to secure its international supply chains and prevent greater foreign powers (namely the United States) from approaching too closely areas of strategic concern. The greater standing of the PLAN, PLAAF, and Second Artillery Corps is already showing signs of solidifying, since officers from these services used not to be guaranteed representation on the CMC but now appear to have a permanent place.

MARK WILSON/Getty ImagesCentral Military Commission Vice Chairman Gen. Xu Caihou and a military delegation in WashingtonThere is also a slight possibility that the two individuals chosen to be the CMC vice chairmen could both come from a background in military operations. Typically the two vice chairmen — the most powerful military leaders — are divided between one officer centered on military operations and another centered on political affairs. This ensures a civilian check on military leadership, with the political commissar supervising the military in normal times, and the military commander having ultimate authority during times of war. However, given the candidates available for the position, the precedent could be broken and the positions filled with officers who both come from a military operational background. Such a configuration in the CMC could result in higher emphasis on the capability and effectiveness of military rather than political solutions to problems and a CMC prone to bridle under CPC orders. But having two military affairs specialists in the vice chairmen seats is a slim possibility, and personnel are available from political offices to fill one of the vice chairmanships, thus preserving the traditional balance and CPC guidance over military affairs.

Civilian Leadership Maintained

The rising current of military power in the Chinese system could manifest in any number of ways. Sources tell STRATFOR that military officers who retire sooner than civilian leaders may start to take up civilian positions in the ministries or elsewhere in the state bureaucracy. Nevertheless, the overall arc of recent Chinese history has reinforced the model of civilian leadership over the military. The Communist Party retains control of the CMC, the central and provincial bureaucracies, the state-owned corporations and banks, mass organizations, and most of the media. Moreover, there does not appear to be a single military strongman who could lead a significant challenge to civilian leadership. So while the military’s sway is undoubtedly rising, and the upcoming civilian leadership could get caught in stalemate over policy, the military is not in a position to seize power. Rather, it is maneuvering to gain more influence within the system, adding another element of intrigue to the already tense bargaining structure that defines elite politics in China. But despite possible military-civilian frictions, the PLA will seek to preserve the regime, and to manage or suppress internal or external forces that could jeopardize that goal.

Up to this point, the scenario sounds incredibly similar to the run-up to the housing bust in the United States. But there are crucial differences. Let me describe a few.No. 1: Chinese buyers aren't nearly as leveraged as US buyers wereDown payments in China were a high 30%; in the U.S., at the height of the frenzy, lenders were bundling two mortgages together so that a buyer could borrow the required (and much smaller) down payment as well. Homebuyers effectively were putting nothing down.

And Chinese homebuyers started off with a much larger base of savings. In 2009, the Chinese savings rate was about 40%. In the years just before the end of the U.S. boom, Americans' savings rate had actually turned negative.

As a result of those differences, I don't think a real-estate bust in China would set off the huge contraction of family balance sheets and consequent steep drop in consumer spending that have resulted from the bust in the United States.

China has waited patiently for decades for some of its brightest and most accomplished scientists to return. Until recently, it could not offer high-quality research facilities, adequate funding or an attractive research environment.

But in the past few years, the government has invested heavily in infrastructure, constructing campuses and science parks to accommodate what it hopes will be a boom in homegrown technological advances, particularly in such fields as nanotechnology, computer science and pharmaceuticals. The government's goal is to turn new discoveries into products as quickly as possible.

Richard Appelbaum, a professor of sociology and global studies at UC Santa Barbara, said he recently visited a vast new research facility outside Shanghai.

"This is a science park the size of a city," he recounted. "It's all brand-spanking-new buildings that have been put up by the government of Suzhou. They are occupied by all these startup companies, working in biology and at the interface of nano and biology. It's all very impressive, at least to an outsider."

With the "Thousand Talents" program, China is not only luring "sea turtles," but also showing new flexibility by negotiating part-time deals with "sea gulls," who split their time between universities in China and the U.S.

One "sea gull" is UC San Francisco professor Chao Tang, who also is founder and director of the Center for Theoretical Biology at Peking University, where he teaches part of the year.

A leader in the field of quantitative biology, Tang said holding positions at the two universities gives him the best of both worlds: He can stay connected with experts in his field in the U.S. while still being part of the transformation of science in China.

Sharply raising the stakes in a dispute over Japan’sdetention of a Chinese fishing trawler captain, the Chinesegovernment has placed a trade embargo on all exports to Japanof a crucial category of minerals used in products likehybrid cars, wind turbines and guided missiles.

GM is the one who got me looking into the Rare Earth Metals hypothesis (e.g. the Dines Newsletter) and I have positions in PALL (up roughly 20%, TIE up roughly 70%, MCP up roughly 65% in only a few weeks, and REE up 12% in three days. Today's news probably caused the strong pops in REE and MCP and these pops will ratchet back as the situation with the Japanese presumably clarifies, but nonetheless the thesis that China will use its powerful leverage with these indispensable minerals seems now to be proven.

BEIJING (AP) — China is investigating four Japanese suspected of illegally filming military targets and entering a military zone without authorization, state media reported amid a tense diplomatic spat between Beijing and Tokyo over a fishing boat collision near disputed islands.

China's state-run Xinhua News Agency cited state security authorities in the northern city of Shijiazhuang as saying they had "taken measures" against the four Japanese "after receiving a report about their illegal activities." There was no elaboration.

The authorities accuse the Japanese of entering a military zone without authorization in Hebei province, the capital of which is Shijiazhuang.

The brief report late Thursday night did not say whether the four Japanese are in detention.

The four men are believed to be employees of Fujita Corp., a Tokyo-based construction and urban redevelopment company.

"We are pretty certain they are our employees," said Fujita spokesman Yoshiaki Onodera. "But we have not spoken with them, so we don't know how they came to be questioned."

Onodera said he could not confirm Japanese media reports saying that the men were preparing a bid on a project to dispose of abandoned chemical weapons from World War II.

The Japanese Foreign Ministry confirmed that it had received word from the Chinese government Thursday night about the incident. It did not have further details, including whether the men had been arrested or merely questioned.

The news could further sour relations that have deteriorated badly since earlier this month when Japan arrested a Chinese captain whose fishing boat collided with Japanese coast guard vessels near a string of islands in the East China Sea. Called Diaoyu or Diaoyutai in Chinese and Senkaku in Japanese, the islands are controlled by Japan, but are also claimed by China. They are surrounded by rich fishing grounds and are regularly occupied by nationalists from both sides.

Japan extended the detention of the Chinese captain Sunday, and Beijing reacted quickly, suspending high-level contacts with Tokyo and ruling out a meeting between Premier Wen Jiabao and Japanese Prime Minister Naoto Kan during U.N. meetings in New York this week.

On Tuesday, Wen threatened "further action" against Japan if it did not release the Chinese captain immediately.

Meanwhile, the United States on Thursday urged the two powers to quickly resolve the dispute and a military official said that Washington was committed to strongly supporting Japan, one of America's closest allies in the Pacific.

At a Pentagon news conference, Chairman of the Joint Chiefs of Staff Adm. Mike Mullen said the U.S. was tracking the situation closely and hoped that diplomatic efforts would ease tensions soon.

"And obviously we're very, very strongly in support of ... our ally in that region, Japan," Mullen told reporters.

Defense Secretary Robert Gates added "and we would fulfill our alliance responsibilities," without offering more specifics.

But besides hoping that tensions ease between China and Japan, Mullen said "we haven't seen anything that would, I guess, raise the alarm levels higher than that."

The dispute faces a test on Sept. 29, the deadline by which Japanese prosecutors must decide whether to charge the Chinese captain. Fourteen crew members and the boat have been returned.

"It will be the last straw for Beijing if Japan insists on trying the Chinese captain for his fishing operation off the Diaoyu Islands, in the East China Sea," said the Global Times. "Although Japanese leaders hope the fishing boat issue will be seen as a stand-alone incident and will not hurt the two countries' normal relations, it is impossible for China's protest to remain verbal only."

After making it clear that "Japan's handling of the case is seen as a direct challenge of China's sovereignty over the contended islands", the Global Times issued this stern warning:

Suspension of the East China Sea gas field talks, scheduled for mid-September, is the first move of China's counter strike. Given the decades of relationship building after WWII, China will probably not resort to force over this incident. But, if the protests from the Chinese government and public don't bring the Japanese back from the brink of a relations breakdown, Beijing has to consider stronger retaliatory measures.

Other obvious moves include the suspension of a high-level visit to Japan by a senior Chinese government official, and a series of awkward maneuvers southwest of Okinawa between Chinese maritime patrol ships and Japanese survey vessels which suggested that more confrontations could soon occur.

Chinese Foreign Ministry spokeswoman Jiang Yu said the Japanese actions as a whole in this instance violated the law of nations and were "ridiculous, illegal and invalid".

"Japan will reap as it has sown, if it continues to act recklessly," Jiang warned.

Is this more than an untimely error on the part of a Chinese fishing boat captain? After all, any attempt by China to fabricate an incident at sea involving a Chinese commercial or fishing vessel would not come as a surprise. While the focus previously has been primarily on the South China Sea, it is possible that China may also be preparing to make more aggressive moves in the East China Sea. [2]

CHINESE officials like to lecture their American counterparts that, when it comes to loosening their tightly controlled currency, pressure is counterproductive. Tim Geithner, the treasury secretary, has resisted direct confrontation with China over the yuan’s value. Like his predecessors, he worries that overt pressure would undermine advocates of reform inside China, principally the People’s Bank of China, and erode co-operation on other issues such as Iran and North Korea.

When China said in June that the yuan would be allowed more flexibility, it looked like a victory for Mr Geithner. But as weeks elapsed and the yuan stayed put, the critics began to resurface. “We’re all coming to the conclusion that they don’t believe we’re serious,” Jack Reed, a Democratic senator, told Mr Geithner on September 16th. “And as a result, they will listen to you politely but they will not take any effective action.”

The administration increasingly appears to agree. On September 15th it brought two actions against China at the World Trade Organisation (WTO): one contesting Chinese duties on American exports of a special type of steel used in power generation, and another over discrimination against foreign providers of payment-card transactions.

At a time when Washington and Beijing are already sparring about exchange rates, North Korea and territorial disputes in the South China Sea, the nuclear deal could spark a fresh diplomatic argument. The Obama administration has already come out against the sale of the two reactors and has made nuclear proliferation one of its signature foreign policy issues.

“This sets up a potential conflict between China and the US,” said Mark Hibbs, an expert on nuclear ­politics at the Carnegie Endowment.

“A resolution will require a diplomatic discussion between the US and China about the future of the nuclear trade.”

China's recent move to limit exports of minerals critical in the manufacture of a vast array of products such as missiles, car batteries, cellphones, lasers and computers is stoking alarm that its domination of the industry could give it enhanced leverage over the United States.

On Thursday, some traders of "rare earths," 17 minerals that are used in small portions in almost every advanced industrial product, reported that China, which controls 97 percent of the industry, had halted the export of anything that contained traces of the minerals to Japan. The Chinese government denied the allegation.

The purported export ban was linked to a dispute between the two countries over an island chain called the Senakus in Japanese and Diaoyu islands in Chinese. Japan has detained the captain of a Chinese fishing vessel over a collision at sea with a Japanese coast guard ship. On Thursday, Chinese Premier Wen Jiabao demanded that Japan release the boat captain immediately. China also announced that it had arrested four Japanese near a Chinese military installation.

Analysts and manufacturers said regardless of whether China has indeed blocked these exports to Japan, the incident underscored China's increasing economic leverage and its seeming willingness to try to translate that into political power.

This summer, China's Commerce Ministry said that total exports of rare earths would be capped at about 30,300 metric tons - a 40 percent drop compared with last year. Most of that tonnage has already been shipped.

"The most important issue here is that China is able to wield power like this," said Ed Richardson, the vice president of Thomas & Skinner, a magnet maker in Indianapolis. "Just the reports that they might have done something like this has sent a chill through the industry. Here you have an incident over a fishing boat and this topic comes up. It's startling."

Only in the past year has the issue begun to receive significant attention in Washington. In April, the Government Accountability Office reported that it could take as long as 15 years to rebuild the U.S. rare earth industry. The GAO report also found components in U.S. defense systems that use Chinese sources for rare earth materials. And it determined that the Defense Department had "not yet identified national security risks or taken departmentwide action to address rare earth material dependency." The Defense Department, however, is studying this issue, and a report is slated to be delivered this month.

On Thursday, the House Committee on Science and Technology approved legislation that would provide funds for research and development of rare earths technologies as a first legislative step to break China's monopoly.

"Rare earth materials are essential for our country's technological competitiveness and our national security, yet China is cornering the market and we are falling behind," said Rep. Kathy Dahlkemper (D-Pa.), who wrote the legislation.

For years, China has worked to dominate the rare earths industry. Starting in the late 1980s and early 1990s, China flooded the world with cheap rare earths. It sold neodymium and samarium, which form the basis of extraordinarily powerful magnets needed for precision-guided missile systems and the batteries used in hybrid or electric vehicles. It mined europium, which forms the basis of the high-efficiency lighting industry; lanthanum, without which it would be difficult to refine gas; and cerium, which is used to polish the glass on computer screens and cellphones.

China's prices were so low that it led the once-biggest mine in the world - Mountain Pass in California - to shut its operations in 2002 after allegations of environmental violations at the facility.

"In the Western world, people were happy to give the Chinese this job," said Jaakko Kooroshy, an analyst at The Hague Centre for Strategic Studies. "Mining rare earths is a dirty business. It is environmentally really dangerous. There's radioactivity involved."

From mining, China moved up to refining and advanced metallurgy. They drove rare earths refiners out of the market. They obtained patents for downstream work. They bought magnet makers around the world. They offered to massively overpay for three Japanese firms that dominate the production of magnets for computer hard drives. They made a run at Richardson's firm as well.

"We're an employee-owned operation," Richardson said, "so if they'd bought us up and shipped us to China . . . well, let's just say it wouldn't have sat well with the employees here."

Today, China dominates not just the mining but also the refining of rare earths, and the profits are enormous. Prices of several minerals have jumped 200 percent in the months since China announced it was limiting exports.

Western countries and firms have been slow to respond to the challenge that China posed to key industries from defense to energy to information technology, said Jon Hykawy, an analyst at Byron Capital.

In the 1990s, as China sold cheap rare earths around the world, the United States, which used to stockpile rare earths for its defense industry, sold off its stocks and watched as its industry dismantled what was once a complete supply chain. Europe never maintained a strategic stash. Only Japan understood the challenge and several years ago began setting aside significant quantities of the minerals.

"We never really acknowledged that the Chinese were in a race to dominate this industry even though they publicly stated it," Hykawy said.

China is already being sued at the World Trade Organization by the United States, the European Union and Mexico for export restrictions on raw materials, including some rare earth minerals. The U.S. trade representative is also considering filing a separate case purely on rare earths, U.S. officials said. And in industry, Molycorp Metals is working to reopen the California mine.

In June, the European Union issued its own report on rare earths that predicted that the minerals would become increasingly rare. While the United States has focused on China's increasing leverage over its national defense, the EU report reflected worries that China would control the core of green technology in the future.

"This is the first time that the Chinese openly used rare earths as a geopolitical bargaining chip," said Kooroshy in a telephone interview from The Hague. "They have built up a monopoly until now, but they have been very civil about it. They say things like, 'You don't need to be afraid. We're a reliable supplier.' But now the message is clear. It's: 'Look, guys, we're your most important economic partner, and we want you to change the way you deal with us.'"

TOKYO — A diplomatic showdown between Japan and China that began two weeks ago with the arrest of the captain of a Chinese trawler near disputed islands ended Friday when Tokyo accepted Beijing’s demands for his immediate release, a concession that appeared to mark a humiliating retreat in a Pacific test of wills.

Japan freed the captain, Zhan Qixiong, 41, who left Saturday on a chartered flight sent by the Chinese government to take him home. Mr. Zhan had been held by the Japanese authorities since his boat collided with Japanese patrol vessels on Sept. 7 near uninhabited islands in the East China Sea, and Japan had insisted that he would be prosecuted.

His release handed a significant victory to Chinese leaders, who have ratcheted up the pressure on Japan with verbal threats and economic sanctions.

“It certainly appears that Japan gave in,” said Hiroshi Nakanishi, a professor of international relations at Kyoto University. “This is going to raise questions about why Japan pushed the issue in the first place, if it couldn’t follow through with meeting China’s challenges.”

The climb down was the latest indicator of the shifting balance of power in Asia. China this year surpassed Japan as the world’s second largest economy and had already become Japan’s biggest export market. Japan, mired in extended political uncertainty and economic malaise, has had a succession of weak prime ministers who have struggled to assert its interests in a region focused mainly on a resurgent China.

China on Saturday restated its claims to the disputed islands and in a statement demanded an apology and compensation. “Such an act seriously infringed upon China’s territorial sovereignty and violated the human rights of Chinese citizens,” the statement said.

At the outset, Japan had made an uncharacteristic display of political backbone by detaining the captain, when in the past it had simply chased away Chinese vessels that approached too close to the islands, which are claimed by both countries but administered by Japan. Apparently angered by a rising number of incursions by Chinese fishing boats in recent years, Tokyo initially appeared determined to demonstrate to Beijing its control of the islands, analysts and diplomats said.

Instead, the move unleashed a furious diplomatic assault from China. Beijing cut off ministerial-level talks on issues like joint energy development, and curtailed visits to Japan by Chinese tourists. The fact that the detention took place on Sept. 8, the anniversary of Japan’s 1931 invasion of northeast China, spurred scattered street protests and calls by nationalistic Chinese bloggers to take a firm stand against Tokyo.

In recent days, China stepped up its intimidation. Chinese customs officials appeared to block crucial exports to Japan of rare earths, which are metals vital to Japan’s auto and electronics industries. Then on Thursday, four Japanese construction company employees were detained in the Chinese province of Hebei.

In the end, diplomats and analysts said Japan was forced to recognize that taking the next step of charging the captain and putting him on trial would result in a serious deterioration of ties with China, Japan’s biggest trading partner.

“At this point, Japan had only one choice,” said a Western diplomat in Beijing, who spoke on the usual diplomatic condition of anonymity. “It had to charge the captain, or it would have to climb down.”

It chose the latter. On Friday, prosecutors on the island of Ishigaki, where the captain was held, cited diplomatic considerations in their decision to let him go, and suspended their investigation into charges of obstructing officials on duty.

“Considering the effect on the people of our nation and on China-Japan relations, we decided that it was not appropriate to continue the investigation,” the prosecutors said in a statement.

Until Japan’s sudden reversal on Friday, the tussle had grown to dominate both nations’ diplomatic agendas, including during the United Nations development summit meeting this week in New York.

Prime Minister Wen Jiabao of China had refused to meet on the sidelines of the meeting with Japan’s prime minister, Naoto Kan, and instead threatened additional actions if Japan did not release the captain.

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The Japanese used the summit meeting to seek American support for its position. They seemed to get it when Secretary of State Hillary Rodham Clinton told Japan’s new foreign minister, Seiji Maehara, that America’s treaty obligations to defend Japan from foreign attack would include any moves against the islands where the Chinese captain had been arrested.Related

The islands, known as Senkaku in Japanese or Diaoyu in Chinese, are also claimed by Taiwan.

The fact that Japan seemed to back down after escalating the situation brought an outpouring of criticism of Mr. Kan, who was re-elected prime minister just two weeks ago. On Friday, members of his own governing Democratic Party joined opposition lawmakers in condemning the decision to release the captain.

“I’m flabbergasted that this was resolved with such a clear diplomatic defeat for Japan,” said Yoshimi Watanabe, leader of the opposition Your Party.

The setback appears likely to raise new concerns about the leadership of the Democrats, who took power in a landslide election victory last year with promises to improve ties within Asia and reduce Japan’s dependence on the United States.

However, the standoff underscored how sentiment in Japan had hardened against China, even in recent months. Ever more frequent movements by Chinese warships into Japanese waters have stirred fears here that fast-growing China will become more aggressive in pushing its territorial claims.

However, there were also growing calls in Japan for a quick resolution to the standoff, particularly by the business community, which has become increasingly reliant on China for trade and investment. On Friday, the president of the Tokyo Stock Exchange, Atsushi Saito, told reporters he welcomed the release.

“As a Japanese, I have mixed feelings about appearing so weak-kneed,” Mr. Saito said, “but realistically speaking, we had to put this problem behind us.”

In China, the captain’s release appeared to be a victory for the leadership, and particularly the prime minister, Mr. Wen. The Communist Party is keen to show itself as defending China’s territorial claims, which enjoy strong emotional support from the Chinese people. China also views itself as geopolitically hemmed in by Japan and other cold war-era American allies as it tries to take its place as a regional power.

Chinese analysts agreed that Japan had appeared to fold, but said Tokyo had no choice if it wanted to avoid a continued escalation with China.

“This was a move that Japan had to make or China would have taken further steps,” said Wang Xiangsui, a foreign policy analyst at the Beijing University of Aeronautics and Astronautics. “Now the two sides can discuss this more calmly.”

Mr. Zhan, the trawler captain, arrived in the Chinese coastal city of Fuzhou at 4 a.m. local time, according to the official Xinhua news agency. He was met at the airport by senior officials from the Foreign Ministry and the Agriculture Ministry, which had chartered a plane to pick him up after his release in Japan.

When the door of the plane opened, Mr. Zhan was carrying flowers and immediately was greeted with hugs by relatives waiting for him, Xinhua reported.

“Being able to return safely this time, I thank the party and government for their care,” Mr. Zhan said. “I also thank the Chinese people for their concern.”

My money says Japan folded after the US told them that we don't have their back. This win by China will encourage more aggressive moves by them. Japan has a serious loss of face and has to re-examine it's entire national security structure as a result of this.

The relentless pressure on both countries to expand their exports is threatening to create a trade war between the US and China.

Congressmen, feeling the populist pressure from voters back home, have approved a new bill that would place import duties on Chinese goods, if they don't revalue the yuan. The bill has yet to be passed by the House or Senate.

But if the U.S. government enters into a tit-for-tat trade war with China, it's likely the Chinese will respond. And that could hammer U.S. companies that export to China.

We've evaluated the states, using data from the U.S. China Business Council, that export the most to China, and companies that might get crushed in each if a trade war commences.

My money says Japan folded after the US told them that we don't have their back. This win by China will encourage more aggressive moves by them. Japan has a serious loss of face and has to re-examine it's entire national security structure as a result of this.

I don't think the issue is whether we have their back or that they will re-examine their entire national security structure. No one is going to war over these islands.

Rather it's all about the money. China is a huge market for Japanese companies which need to export to survive. Japan decided better to lose face thanrisk economic retaliation. China has leverage; Japan does not. Plus Japan handled the situation poorly.

However as you point out in your most recent post, the same could happen to us.

The captain's release came as a surprise to some Japan Coast Guard officials and sparked criticism that it could result in confusion over the handling of similar incidents in the future. At the same time, a Coast Guard official commented: "It must have been tough for public prosecutors to have to make an unnatural decision like that."

On Sept. 7, when the initial decision to arrest the skipper was made, two unofficial meetings were held by the Japan Coast Guard and related government bodies including the Ministry of Foreign Affairs and the Ministry of Justice. But on Sept. 24, when prosecutors decided to release the skipper, no meetings were staged and it was not until after 2 p.m. that the Japan Coast Guard was notified of the decision. Watching television broadcasts announcing the move, Coast Guard members were angered, with one commenting that Japan had "bowed to pressure." Another disappointed member added: "It made me want to resign from the civil service."

"The case for obstruction of official duties was formed under the direction of public prosecutors. This has set a bad precedent," one official Coast Guard official commenting on the release said. The official became calmer when hearing about public prosecutors taking Japan-China relations into consideration, and said, "The Japan Coast Guard investigation has been proven appropriate. I guess public prosecutors decided to take the responsibility by making a point of referring to Japan-China relations." Still, the official described the release as "a regrettable outcome."

Following the move to release the Chinese captain, the Japan Coast Guard received a flood of telephone complaints from people asking why the skipper had been released without punishment. By 7 p.m. on Sept. 24, some 60 calls had been fielded. One caller reportedly stated, "I've never complained to a public office before, but I can't let things go this time." However, when officials explained that the issue was in the hands of public prosecutors, many callers were reportedly understanding, and instead started praising the Coast Guard, saying they wanted it to continue to clamp down on offenders.

When questioned in a news conference shortly after 5 p.m. on Sept. 24 whether the issue had been dealt with "solemnly in accordance with laws," Land, Infrastructure, Transport and Tourism Minister Sumio Mabuchi stated he had "no particular thoughts" about the decision to release the captain.